Cryptocurrencies and Blockchain: Navigating Risk, Compliance, and Future Opportunities in Corporate Treasury
The world of finance is changing rapidly. The adoption of cryptocurrencies, digital assets or other Blockchain-based solutions by corporations is already well underway.
As a result of the growing importance of this transformative technology and its applications, various regulatory initiatives and frameworks have emerged, such as Markets in Crypto-Assets Regulation (MiCAR), the Distributed Ledger Technology (DLT) Pilot Regime, and the Basel Committee on Banking Supervision (BCBS) crypto standard were launched, demonstrating the growing importance and adoption at both a global and national level. Given these trends, treasuries will be impacted by Blockchain one way or the other – if they aren’t already.
With the advent of cryptocurrencies and digital assets, it is important for treasurers to understand the issues at hand and have a strategy in place to deal with them. Based on our experience, typical questions that a treasurer faces are how to deal with the volatility of cryptocurrencies, how cryptocurrencies impact FX management, the accounting treatment for cryptocurrencies as well as KYC considerations. These developments are summarized in this article.
FX Risk Management and Volatility
History has shown that cryptocurrencies such as Bitcoin and Ether are highly volatile assets, which implies that the Euro value of 1 BTC can fluctuate significantly. Based on our experience, treasurers opt to sell their cryptocurrencies as quickly as possible in order to convert them into fiat currency – the currencies that they are familiar and which their cost basis is typically in. However, other solutions exist such as hedging positions via derivatives traded on regulated financial markets or conversions into so-called stablecoins1.
Accounting Treatment and Regulatory Compliance
Cryptocurrencies, including stablecoins, require careful accounting treatment and compliance with regulations. In most cases cryptocurrencies are classified as “intangible assets” under IFRS. For broker-traders they are, however, classified as inventory, depending on the circumstances. Inventory is measured at the lower of cost and net realizable value, while intangible assets are measured at cost or revaluation. Under GAAP, most cryptocurrencies are treated as indefinite-lived intangible assets and are impaired when the fair value falls below the carrying value. These impairments cannot be reversed. CBDCs, however, are not considered cryptocurrencies. Similarly, and the classification of stablecoins depends on their status as financial assets or instruments.
The adoption of cryptocurrencies and Blockchain technology introduces challenges for corporate treasurers in verifying counterparties and tracking transactions. When it comes to B2C transactions, treasurers may need to implement KYC (Know Your Customer) processes to verify the age and identity of individuals, ensuring compliance with age restrictions and preventing under-aged purchases, among other regulatory requirements. Whilst the process differs for B2B (business-to-business) transactions, the need for KYC exists nevertheless. However in the B2B space, the KYC process is less likely to be made more complex by transactions done in cryptocurrencies, since the parties involved are typically well-established companies or organizations with known identities and reputations.
Central Bank Digital Currencies
(CBDCs) are emerging as potential alternatives to privately issued stablecoins and other cryptocurrencies. Central banks, including the European Central Bank and the Peoples Banks of China, are actively exploring the development of CBDCs. These currencies, backed by central banks, introduce a new dimension to the financial landscape and will be another arrow in the quiver of end-customers – along with cash, credit and debit cards or PayPal. Corporate treasurers must prepare for the potential implications and opportunities that CBDCs may bring, such as changes in payment options, governance processes, and working capital management.
Adapting to the Future
Corporate treasurers should proactively prepare for the impact of cryptocurrencies and Blockchain technology on their business operations. This includes educating themselves on the basics of cryptocurrencies, stablecoins, and CBDCs, and investigating how these assets can be integrated into their treasury functions. Understanding the infrastructure, processes, and potential hedging strategies is crucial for treasurers to make informed decisions regarding their balance sheets. Furthermore, treasurers must evaluate the impact of new payment options on working capital and adjust their strategies accordingly.
Zanders understands the importance of keeping up with emerging technologies and trends, which is why we offer a comprehensive range of Blockchain services. Our Blockchain offering covers supporting our clients in developing their Blockchain strategy including developing proofs of concept, cryptocurrency integration into Corporate Treasury, support on vendor selection as well as regulatory advice. For decades Zanders has helped corporate treasurers navigate the choppy seas of change and disruption. We are ready to support you during this new era of disruption, so reach out to us today.
Meet the team
Zanders already has a well-positioned, diversified Blockchain team in place, consisting of Blockchain developers, Blockchain experts and business experts in their respective fields. In the following you will find a brief introduction of our lead Blockchain consultants.